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3PL and 4PL (Part -1) - Technology Structure, Logistics Management Notes | Study Logistics Management - B Com

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Third-party logistics refers to the concept of outsourcing the logistics and distribution of a manufacturing or service firm to a logistics service provider so that the manufacturing company can focus on its core competencies of new product development manufacturing them and marketing the products.

The logistics and distribution activities add up to almost around 5 per cent to the cost to thereby increasing the final cost of the product. In addition to this the inventory costs add around 15 per cent to the cost of the product. To increase operational efficiency it is necessary for firms to cut these costs to remain competitive. So manufacturing firms outsource these activities to LSPs which in coordination with the manufacturing firms' needs control inventory and reduce costs.

Third party logistics is the activity of outsourcing activities related to logistics and distribution. The 3PL industry includes Logistics Solution Providers (LSPs) and the shippers whose business processes they support. Companies opt for third party logistics for the following reasons:

  •  Improved strategic focus: Using 3PLs companies can concentrate on their core tasks and improve customer satisfaction.

  •  Resource constraints.

  • Lowered costs: According to research reports companies can reduce their inventory management costs by around 15-30 per cent. Also 3PL service providers invest large sums of money in developing processes that aim to achieve logistical excellence, which are unavailable to other companies.

  • Expansion of markets: Outsourcing logistical activities to 3PLs allow companies to get into new businesses, new markets or a new channel of distribution quickly and with a limited outlay of cash.

  • For more professional and scientific approach to logistical problems.

  • For improvement in service levels with improved response time.

  • For efficient management of inventory resulting in bettor utilization of working capital.

  • Increased flexibility: A 3PL contract provides for relatively short term commitments as compared to building and maintaining the same resources by the company itself, thus freeing up resources for other uses.

​In addition to the logistics and distribution functions, 3PLs also perform functions such as fund collection, providing information of goods movement consumer demographics, warehousing and value-added activities such as assembling, packaging, flow of funds and reverse logistics.

The Evolution of 3PLs
The evolution of 3PLs is closely coupled along with the evolution of SCM practices. In the era of mass production, the role that LSPs performed was confined only to the flow of goods from point of origin to the point of consumption. These types of LSPs can be called as the first generation LSPs whose primary functionality was that of transportation -activity.
With increased awareness the manufacturing firm began to closely collaborate with the LSPs to handle both inward as well as outward movement of goods and some sharing of information resulting in the birth of second generation LSPs. However the LSPs were still treated at an arm's length and with some suspicion. The suspicion arose from the manufacturing firms' fears that the LSPs may provide information related to the suppliers and consumers to their competitors. However, with the increased use of information technology that increased the visibility of goods the manufacturing company and the LSPs have come a long way to improve their relationship and now work closely to improve the business of the firm. The LSPs work in tandem with the manufacturing firm to meet their supply chain activities and help manufacturing firms tap new markets because of their efficient and timely distribution of products. The new breeds of LSPs even help the manufacturing firms in designing their SCM strategy and in some cases the IT and communication infrastructure have been closely integrated allowing both the LSPs and the manufacturing firm to share information and aid in better decision-making.

The Infrastructure Required for a 3PL
The 3PL should have adequate infrastructure for servicing its customer requirements. The following type of infrastructure is a prerequisite for a good 3PL.
1. Warehouse
2. Fleet of vehicles
3. Hardware and software to take care of information needs
4. Advanced material handling capabilities
5. Good team of consultants
6. Trained manpower
7. Reach in terms of geography

Selecting a 3PL Service Provider
Though manufacturing or even service companies stand to gain a lot from outsourcing their logistics activities to 3PLs, the returns from such a relationship have not been commensurate with the expected returns. This makes many critics to question the validity of using a 3PL service provider, in turn making the process of selection and evaluating the 3PL all the more important.

Steps While Considering a 3PL Service Provider
The unique challenges posed by the company when they outsource to a 3PL makes it worthwhile for companies to answer a few questions for making their relationship with the 3PL a success. The manufacturing company should consider the following points:

  • Knowing where to go: Companies should define their logistics management goals and attempt to visualize their organization status after they have outsourced their logistics activities. Many companies even employ outside consultants to gauge whether there is a need of a 3PL alliance. The consultants help the company to narrow down to a list of 3PLs and identify their would-be partners.

  • Knowing the needs and objectives: The manufacturing company should know clearly its objectives for outsourcing their logistical activities and then attempt to visualize the organization after it has outsourced their logistical activities. Knowing the needs also helps the companies in selecting a 3PL that best fits in to their requirements. Setting objectives of the outsourcing function should be a cross functional activity with participation of key personnel from all critical departments of the company such as information systems, finance, marketing, production, field staff, human resources and supply chain department.

​The next step is to send out request or proposals or request for quotes from the shortlisted LSPs. There are several factors a company needs to evaluate before setting up an alliance with LSPs. One of them is to know its objective in measurable quantities and clarifying the same to the short listed firms. The company also considers the value-added activities that they expect from the service provider. A major consideration al this point is that the company should determine the need of system integration with that of the LSP.

After getting proposals or quotes from LSPs the companies should do their due diligence on the LSPs capacity and operational performance. Each LSPs should also be evaluated on their long-term commitments to improve operational performance. The LSP should also have some sectoral expertise and the company can find out if the LSP has any client in the same sector. The background search on the 3PL provider can give a lot of insights about the LSP's performance in the above stated areas.

3PL Implementation
Once the company has selected the service provider it must ensure that all the parties involved in the transaction are integrated and coordinated properly for effective implementation before signing the contract the company must make sure that both the parties clarify the requirements properly so that it does not lead to ambiguity. Both the parties should be clear about the service and performance expectations of each other from the contract.
It is also necessary to ensure that the process of employing a 3PL has proper support from the top management, because employing a LSP implies a major change in the hierarchy and culture of the organization. In other words we can say that employing a 3PL means that the visible face of the organization has changed to the 3PL. This requires a major change in the thinking of the marketing and sales department as well as the removal of the in-house logistics staff and so must be dealt with utmost sensitivity.

The Implementation Process
After the contract has been finalized the firms must begin to implement the contract within both the organizations. For implementation there should be a comprehensive plan and periodic checks should be conducted to ensure that the implementation is on track. The review process is very crucial as any minor aberration in the decided course of action could throw the whole implementation process off track resulting in huge disruptions.

Communication plays a crucial role in the whole process and a mix-up in the communication channels could result in loss of data and subsequently loss to the manufacturing firm. This may eventually destroy the mutual trust between the two parties resulting in the failure of the relationship. At this juncture it is important that both parties share their information freely. For effective communication to be ensured in the manufacturing as well as 3PL it is helpful to maintain a one point contact who can effectively co-ordinate the interaction between both parties. This contact may be an account executive on both sides who ensures that strategies in both the organizations are aligned. In addition to the account executive an account manager may also be hired to manage the relationship. For dayto-day activities there should be a team of support personnel. In addition to all this the firm outsourcing to the 3PL should have a contingency plan in place, in case negotiations with the service provider breakdown due to any reasons.

Measuring and Evaluating Performance
After the whole structure has been put in place the manufacturing firm needs to realize that the service provider is an integral part of their business process and commit its resources to invest in long-term relationship. However, at the same time it must also realize that it needs to review the performance of the service provider as it does with any business unit within the organization.
The manufacturing company should review the performance of die 3PL based on the metrics of performance decided initially in the contract. The following are the metrics of evaluating a 3PL:


  • On-time shipment: Percentage of shipments that leave on the designated time/dale as against the total number of deliveries.

  • On-time delivery: Percentage of shipments that reach the customer location on the designated date as against the total number of shipments.

  • Transportation cost per mile: How much it cost to transport a unit per mite against the previous in-house process or against industry standards.



  • Percentage of orders that the 3PL ships in exact quantity as against specified on the shipping order.

  • Per unit cost of warehousing.

  • Cost of warehousing including the overheads.

  • Ability of moving the goods from one dock to another within specified time period.

  • Number of cases handled per hour or per employee.

  • Picking accuracy: Percentage of lines with errors vs. total number of lines.

  • Order fulfillment.

  • Item Fulfillment.

  • Inventory accuracy: Number of errors in reporting inventory in warehouses.

  • Loss and damage: Loss and damage resulting from contractor negligence.


  • Service costs: The number of times the service provider meets the targeted reduction in costs.

  • Cost reductions: Service provider initiatives to cut costs quarter to quarter.


  • Reports: Ability of service provider to supply reports to manufacturing firm with the required information.

  • Process improvement: Initiatives jointly developed by the manufacturing firm and the 3PL to improve process performance.


  • Customer satisfaction: Customer satisfaction surveys for the customers serviced by, the 3PL.

  • Handling routing: Excess /shortage of inventory in the warehouse indicating improper warehousing.

​In addition to these quantifiable metrics there are some other factors that should also be considered while evaluating the 3PL. Some of these are listed below:

  • Flexibility: Ability of the 3PL to make changes in the processes according to the requirements of the manufacturing company.

  • Support of top management: The top management of the service provider plays a crucial role in making a commitment to a long-term relationship.

  • Investments in infrastructure: The 3PL should also make considerable investments on the Information Technology and communication front.

  • Financial stability: A 3PL contract calls for major investments by the service provider in the initial years for warehouses, fleets etc. and hence may not realize any gains in the first one or two years. Hence, the financial stability of the service provider is also crucial to the success of the alliance.

​Operations of Indian 3PLs
The Indian 3PL industry is still in a stage of infancy as compared to their western counterparts. The major operators having a presence in India are as follows:
1. Gati
2. Transport Corporation of India Ltd.
3. Blue Dart Logistics
4. DHL Logistics
5. FedEx
6. AFL Logistics

There are many other foreign operators who provide services in India and who have come into the limelight. These players include Panalpina, Frans Maas, Excel Logistics, and Bax Global. The typical activities that are performed by the 3PL operators in India include warehousing and transportation including full truck load and less than full truck load. Initially the outsourcing activities were only confined to transportation activities. However, there has been a change in the perspective of the outsourcing activities. The 3PL providers have moved from the role of transportation and are increasingly undertaking total supply chain activities for clients. However, these activities are becoming increasingly commoditized and what differentiate one 3PL player from others are sectoral expertise and the value-added services they offer. Value Added activities of 3PL: The value added activities of a 3PL service provide have seen them move from the role of a 3PL to operators offering financial services for fund routing and also information centers to give information to clients regarding customer demographics.

Blue Dart Logistics
Blue Dart Logistics provides various e-business solutions to its customers for information flow and increasing the visibility of goods. Some of the e-commerce initiatives are given in Table

TABLE Some e-commerce initiatives of Blue Dart 





Track Dart 

Track status of shipment


Mail Dart 

Track shipments using mail


Location Finder

Find service location


Transit Time Finder 

Check transit times for shipment



Receive invoices online


Schedule a Pickup

To schedule customer consignments picking


Waybill Generation

Generate a waybill for consignments


Image Dart y

Tool for downloading proof of deliver

Some other value added-services that are offered are reverse logistics, kitting services, and custom clearances.

Transport Corporation of India
TCI is an umbrella organization that provides services in the field of supply chain management. It has other sister concerns such as TCI Seaways, TCI Logistics, XPS cargo and Transystem. The main services offered by TCI are in the area of consulting, transportation management services, warehousing services, IT and MIS reporting services and other value-added services.
The following are the value-added services offered by TC1:
1. Reverse logistics
2. PDI/COD services
3. Kitting services
4. Custom clearance services
5. E-logistics
6. Risk and tax facilitating management

AFL Logistics Ltd
AFL Logistics provides the following services in the field of international logistics, domestic logistics and supply chain management. It provides international logistics solutions through its alliance with DHL Logistics. The following are the value added services provided by AFL Logistics Ltd.: 

  • Product Repair / Return Services

  • Kitting / Pick and Pack

  • Insurance, Sales & Octroi Management

  • Multimodal Services

  • Sales Promotion Management

  • Collections & Banking Services

  • Quality Assurance & Control Services

  • MIS & Reporting 

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